CONTENTS

Foreword

Forward programme 1999–2002

Setting new price limits

Regulating company performance

Approving water and sewerage charges

Extending competition

Cost effective regulation

Ofwat Management

 Foreword

This document sets out our forward programme over the three years from 1999–2000 to 2001–02. It has benefited from comments from interested parties on a consultation draft.

During 1999–2000 we will be extremely busy conducting the final stages of the 1999 five year price review. Draft determinations of price limits for all the water companies will be issued in July and final numbers will be settled in November. Should companies wish to be referred to the Competition Commission, the process will continue throughout the remainder of the financial year and could extend into 2000–01.

The price review presents the opportunity for transferring to customers the substantial increases in efficiency which water companies are currently achieving under the incentive based regulatory regime. In subsequent years we must monitor the service provided by water companies and, where there are deficiencies, take action. This is necessary to ensure companies provide the necessary services and give their customers value for money.

In 1999–2000 we will consult on the use of the powers given to me under the Water Industry Bill 1999 to approve company charges schemes. Such approval will take due account of any Regulations issued by Ministers and the need for companies to avoid undue discrimination in charges to customers.

The Competition Act 1998 opens up the scope for the regulator to take a more active approach in developing competition in the water industry. The relevant provisions of the Act come into force in March 2000 and I intend that we should use those powers positively to strengthen competitive forces. We will issue guidelines early in 1999–2000 on how we will administer this Act. I welcome the review being conducted by the Deputy Prime Minister. I hope this will include consideration of ways of facilitating the transfer of abstraction licences.

Regulators need advice. I will continue to work closely with the Ofwat Customer Service Committees and the Ofwat National Customer Council. As the Accounting Officer I am responsible for the funding of the ten CSCs, and look forward to the achievement of the CSC/ONCC Forward Plan 1999–2000. The close relationship which exists between us is one of the great strengths of the regime. I have also found it very helpful to have advice on business matters from my panel of senior industrialists.

Looking further ahead inevitably becomes more difficult in a changing environment. However, we will want to review the process of the 1999 price review, and consider ways in which it might be simplified and streamlined. We will also want to look at the information provided by companies, used in regulation and disseminated to customers and the wider public.

Looking to the long term, the privatisation statute provided for water companies to hold licences for 25 years. If they are not to be renewed, the Secretary of State must give ten years notice of changes. The present structure of the industry should not be sacrosanct. There are limited economies of scale. It is arguable that a less vertically integrated industry would be more conducive to the development of competition. I believe that changes that might be needed should be put in place through Government action rather than purely by reliance on market forces. I will encourage my successor to investigate the options and to advise the Secretaries of State in time for them to make considered judgements by 2004.

As Ofwat enters its second decade, we have established an efficient and fair process of regulation. We operate an open and consultative regime, while being innovative and flexible. We now face significant administrative change as a result of the Government's intending legislation on the regulation of utilities. This will impose additional burdens but we shall endeavour to ensure that time spent on reorganisation does not materially reduce our effectiveness as a regulator.

My term in office as Director General of Water Services extends to the summer of 2000. I aim to make sure that my successor take the helm of a committed, effective office that is well placed to develop economic regulation of the water and sewerage service in the new millennium.

 I C R BYATT

Director General of Water Services

FORWARD PROGRAMME 1999–2002

The primary aim of Ofwat is to support the Director General of Water Services (the Director). His main statutory responsibilities are set out in the Water Industry Act 1991.

Since privatisation in 1989, the industry has made significant progress: companies have become more efficient, water quality has improved, investment to clean up rivers, estuaries and the coast has been substantial and service to customers has improved. The cost of these gains has been higher bills. The challenges for regulation in the next ten years will be different from those in Ofwat's first decade. The office will be regulating an industry that has made considerable progress in its technical, financial and managerial acumen. Customers' expectations for better services and value for money are rising. The European Union (EU) and the Government are raising standards of water quality and the overall water environment. The aim for Ofwat is to balance these competing factors and ensure real benefits to the customer at an affordable price.

Our forward work programme and priorities for the three years from 1999–2002 are set out under the following headings:

• setting new price limits;
• regulating company performance;
• approving water and sewerage charges;
• extending competition;
• options for the renewal of licences;
• managing uncertainty;
• working with customer representatives; and
• cost effective regulation.

SETTING NEW PRICE LIMITS

The first priority in our forward programme, during 1999 is to carry out the final stages of the price review (PR99) for the five year period 2000–2005.

The interaction of environmental and economic issues is particularly strong in this review. Ministers have given guidance on the environmental obligations for the period 2000–05. The Director has a statutory duty to allow for the costs of meeting these obligations.

Transparency and predictability will continue to be a priority. We will issue draft determinations of price limits for all the water companies on 27 July 1999. The minimum outputs required of companies will be set down in these determinations. The price limits will transfer to customers the substantial increases in efficiency which companies are currently achieving under the incentive based regulatory regime.

The draft price limits will reflect the Director's judgement following analysis of the PR99 data submissions, receipt of advice from specialist consultancies and the Ofwat panel of senior industrialists, meetings with the companies and a full assessment of the widespread consultation process that has been held throughout PR99. Each company will receive a written confidential explanation from the Director of the factors underlying their draft determination. A published draft determination report will explain the basis for the Director's decisions and set out individual draft company K factors, infrastructure charge limits, and the outputs required during the next price limit period.

Price setting will be completed after the Director has assessed the representations made to him by the companies and others about the draft determinations. Price limits should deliver increased efficiency and maintain incentives for companies to reduce costs, improve services and deliver the Government's statutory obligations placed on the companies, all within a framework of challenging price limits.

The final determinations of price limits will be published by the end of November 1999. The new price limits will take effect between 1 April 2000 and 31 March 2005.

Should companies wish to be referred to the Competition Commission the process will continue. Our work would continue throughout the remainder of 1999–2000 and extend into 2000–01 to explain to the Commission the basis for our final decisions.

Following the Director's final decisions on price limits, companies will publish their five year monitoring plans by 31 March 2000. These plans will describe how customer service standards and environmental obligations will be met under the new price limits. We will ensure that the plans reflect decisions at the price review.

REGULATING COMPANY PERFORMANCE

Tough regulation is a vital component of our forward programme, to protect customers and drive efficiency. Following the price review, a major part of our role will be to monitor company performance and, where there are deficiencies, to take action. This is necessary to secure that companies properly carry out their functions and give their customers value for money.

In pursuing this objective, we will;

• operate an open and transparent process;
• operate an effective process; and
• use data efficiently.

Following the final determination of price limits, companies will publish their monitoring plans for 2000–05 by 31 March 2000. These will provide details on service quality and environmental improvement outputs and how these will be met under the new price limits. We will review these plans to check that they reflect the outcome of PR99 and take any regulatory action necessary.

Our regulation of company performance will cover;

• company outputs;
• serviceability to customers;
• comparative competition;
• leakage and efficient use of water; and
• the 2004 price review.

We will generally monitor outputs and investment on an annual basis, through the July Returns and Regulatory Accounts and specified reports from the quality regulators. We will work closely with the Environment Agency (EA) and Drinking Water Inspectorate (DWI) to ensure that companies deliver the outputs specified in the final determination of price limits.

Evidence of a likely failure to deliver required improvements will lead to requests for additional reports from the companies (eg quarterly reports), scrutinised by the Reporters. Regulatory concerns could lead to requirements for formal undertakings from the companies.

Failures to deliver the required minimum outputs will lead to regulatory action and prosecution or enforcement proceedings by the quality regulators. We will record and quantify shortfalls in cost terms. We will trigger an interim determination of price limits if the costs are material. If not, we will carry forward shortfalls to the 2004 price review.

Serviceability to customers

We will monitor serviceability to customers, in particular the maintenance of the asset networks for both current and future customers. Our focus will be on assessing trends in service performance indicators, but measures of capital maintenance activity and short-term variability will also be taken into account.

We will monitor and report annually on supply failures and interruptions and incidents where the supply has been poor and take action where necessary.

Comparative competition

Comparative or yardstick competition will continue to play a key role in our work because of the lack of direct competition.

We will publish annual reports on;

• financial performance and expenditure;
• levels of service; and,
• unit costs and efficiency.

We will carry out regular market research and customer satisfaction surveys. We will develop levels of service indicators to ensure they reflect customer requirements.

We will provide comparative data on efficiency and customer service standards to companies' remuneration committees to inform their decision making on boardroom pay.

Balancing supply and demand including leakage and efficient use of water

We will monitor the water resource positions of the water companies to ensure that the Director is kept fully briefed on each company's demand management position, as part of the Director's statutory duties under the Water Industry Act 1991.

We will set leakage targets annually, six months before the start of the year on which they will apply, and then publish the performance of companies in meeting their targets in our yearly report on Leakage and water efficiency.

We will work with the EA to promote best practice in the most economic manner of reducing water consumption.

The 2004 price review

We will record and understand the companies' costs and year-by-year outperformance, so that we can reflect relevant factors in judgements and decisions at the 2004 price review. In particular, we will quantify outperformance, since uncertainty in this area would be detrimental to incentives.

In addition to publishing comparative information and taking regulatory action we intend to carry out the following:

Prices

• Each year Ofwat will review, and based on pending legislation approve company charges. This is covered in more detail below under the section of Approving Water and Sewerage Charges.

• Secure regular information on customer satisfaction and carry out market research to maintain up-to-date information on customers' views.
• Develop levels of service indicators to ensure they reflect customer requirements.

• The Director will determine certain disputes between customers and companies. Decisions are lodged in the Ofwat Library with the aim of informing companies, so that dispute resolution avoids the need to refer to the Director. It is also hoped that companies will learn by this process.

• With respect to multi-utilities, Ofwat will work closely with the other economic regulators, as set out in the joint paper Regulatory issues associated with multi-utilities (May 1998). Work will be directed to ensuring that costs are allocated appropriately and that licence conditions governing relationships with parent and associate companies are complied with.
• Transactions between water companies and associates will be monitored and action will be taken where necessary to ensure compliance with licence requirements for ringfencing.

• Companies will be expected to demonstrate that they have tarrif structures in place that signal the costs imposed at the margin by customers' demands. These costs will differ according to the nature of the demand (eg peak versus average demands) and tariffs should differ accordingly.
• We will produce a document that summarises the various approaches to Long Run Marginal Costs, presenting the results of companies' calculations, and postulating how this work might be applied to tariffs.
• We will contribute to the development of policy on economic instruments for water abstraction following review of the subject by the Department of the Environment, Transport and the Regions (DETR).

• We issue specific guidance to the Ofwat Reporters in each July Return and Periodic Review Reporting Requirements document. Reporters are engineering consultants, used by Ofwat to audit company returns. Audit plans are submitted by Reporters and assessed for completeness of coverage. The objective is to ensure consistency of approach to the reporting task across the companies, with the ultimate aim of receiving comparable regulatory information from the companies, and to ensure that the Reporters' efforts are focused on the information having the most impact on regulatory decision-making.
• Ofwat will work with the companies to ensure continuity in the effectiveness and value for money of the Reporters' work for the Director.
• The majority of Reporters' contracts with their companies will terminate in late 2000/early 2001. This will be an appropriate time to review the effectiveness of the present arrangements and whether alternative arrangements should be made for advising the Director on the quality of the information supplied to him by companies, or whether additional steps should be taken to secure advice that meets the Director's needs.

The monitoring and performance analysis work results in the publication of six annual reports . The timetable, which is subject to change, is:

• Tariff structure and chargesMay
• Director's annual report to the Secretaries of StateJune
• Financial performance and expenditureSeptember*
• Levels of serviceSeptember*
• Unit costs and efficiencyDecember
• Leakage and efficient use of water December

APPROVING WATER AND SEWERAGE CHARGES

Our forward programme anticipates that extra work will arise from the Water Industry Bill 1999. This legislation is intended to introduce a fairer water charging scheme which will take into account environmental and social needs. We are likely to have new powers to approve company charges schemes. We will consult during 1999 on this.

It is envisaged that the approval of charges schemes will cover three principal elements; compliance with any regulations made by the Secretary of State, compliance with any statutory guidance given by the Secretary of State and compliance with any criteria the Director will apply in relation to his statutory duties, notably in relation to discrimination.

However, we will ensure from 2000 onwards that the companies' charges are in accordance with Regulations under the Bill, take due account of guidance given to us by Ministers on social and environmental matters, avoid undue preference, undue discrimination and do not rise by more than the limits set at the review. Our analysis will focus on the annual Principal Statements and Charges Schemes. These will be submitted by the companies each January.

The process for approving charges schemes will need to be implemented for charges to be set for the year 2000–01 and, as such, Ofwat will need to go through the process of approving charges scheme for the first time during the year 1999–2000. The main outputs for the year 1999–2000 will be as follows:

• Consultation on the process Ofwat intends to follow for approval of charges scheme contained in the 1999–2000 Report on Tariff Structure and Charges, to be published in May 1999.
• Consultation with CSCs through written correspondence during April/May 1999 on the process and scope of the power to approve charges schemes.
• Issue of a consultation paper on the criteria that the Director intends to apply in approving charges scheme for 2000 and beyond (June/July 1999).
• Responses to consultation from water companies and other interested parties (by end of August 1999).
• Publication of conclusions of consultations by Ofwat (September 1999).
• Submission of draft charges schemes by companies (October/November 1999).
• Feedback to companies on charges schemes by Ofwat through correspondence during November/December 1999.
• Submission of charges schemes for approval by the Director General with Principal Statements (January 2000).

The Director also intends to explore with the DETR the prospects of offsetting some of the revenue effects for optional metering through a widening of the scope for selective metering (eg in areas where water resources are short).

EXTENDING COMPETITION

Our forward programme includes new initiatives for extending competition;

• the Competition Act 1998; and
• other measures to stimulate competition and attract new entrants.

We will continue to implement the process for the granting of inset appointments. This process is based on the publication, Inset Appointments — Guidance for applicants. We will ensure applications are granted within four months for greenfield sites, and within seven months where a bulk supply or sewerage connection agreement is required, from when the Director is asked to determine terms.

We will advise Ministers as part of their review of competition of the need to reduce the inset appointment threshold to 100 million litres per year and to change the legislation where necessary. In particular we will advise Ministers to consider ways of facilitating the transfer of abstraction licences.

We will produce guidelines during 1999 on how the Competition Act will apply to water. The guidelines are expected to cover how the Competition Act could allow for greater competition through;

• facilitating the development of common carriage;
• allowing for competition in making new connections;
• preventing predatory pricing;
• preventing companies levying excessive capital contributions on customers; and
• providing access to unused licenced sources of water.

Options for the renewal of licences

The privatisation statute provided for water companies to hold licences for 25 years. If they are not to be renewed, Ministers must give ten years notice of changes. The legislation provides broad reasons for termination within the licence period. We will, however, need to develop the rules and policies for deciding whether or not to terminate company licences or, indeed, whether the current licences should be extended for a further period of up to, say, 25 years. We will consult widely on these issues before the end of 2002.

We will not regard the present industry structure as sacrosanct: There are limited economies of scale and less vertical integration that would be more conducive to the development of competition. The Director believes that changes that might be needed should be put in place through Government action rather than purely by reliance on market forces. We will therefore investigate the options and advise Ministers in time for them to make considered judgements by 2004. The continuity of services to customers will be our primary concern in these arrangements.

Managing uncertainty

Substantial areas of work, other than those described above, will inevitably arise over the period 1999–2002. We will respond as required over the three years to events such as:

• Government policy initiatives and legislative proposals;
• proposed company mergers and acquisitions; and
• interim determinations.

Working with customers representatives

A Fair Deal for Consumers

Our forward programme allows for significant administrative change, following legislation on the regulation of utilities. We will endeavour to ensure that time spent on reorganisation does not materially reduce our effectiveness as a regulator.

We have already implemented the majority of Ministers' recommendations and will continue to pursue the aims of the Government's publication A Fair Deal for Consumers. An independent customer representative body is proposed although the detail, legislative framework and timetable remain uncertain. Once the proposals have been clarified, we will devise arrangements for working with the new body. In preparation, greater managerial support will be provided to ensure requests by the Director to the Ofwat Customer Service Committees (CSCs) are properly focused.

A powerful voice for the consumer is to be welcomed. In its first decade, Ofwat has made considerable progress in meeting the objectives of A Fair Deal for Consumers by setting up ten regional CSCs and the Ofwat National Customer Council (ONCC).

In line with A Fair Deal for Consumers, we will publish our code of practice. This will cover consultation and decision making processes, access to information and standards on communication with interested parties.

A Fair Deal for Consumers recommended that regulators should produce three year forward programmes. This document was subject to consultation between November 1998 and January 1999. It is designed to inform the customers, companies and other interested parties of the objectives proposed to be achieved over the period 1999-2002. It will allow open scrutiny of our work plan, resources and corporate governance.

From 1999, the CSCs and ONCC will produce a single corporate programme that reflects their aims for the customers. We look forward to working closely with them in publishing complementary forward programmes.

We look forward to working with the other economic regulators on issues of common interest.

Both Ofwat and the CSCs/ONCC will respond to the Government's proposals and, in particular, will emphasise the requirements for adequate resources and clarification on the proposed sources of income.

Ofwat and its Customer Service Committees

The Director looks forward to working closely with the CSCs and ONCC in achieving benefits for customers. The Director will consult with the CSCs and the ONCC on policy affecting customers and looks forward to regular contact and meetings.

The Director will continue to support their work by providing resources, accommodation and central services eg public relations, legal advice, IT and financial services.

During 1999–2000 the Director requires from the ONCC and CSCs a number of important outputs. These are:

Periodic Review

• Advice on whether individual company proposals in Business Plans for improvements to services should be recognised in revised price limits.
• An assessment of elements of company performance as part of the Director's overall assessment of company performance.
• Advice/information on companies' local consultation activities, and whether companies' Business Plans have customer support.
• Views on the Director's draft determinations of price limits.

• Reports on the quality of service provided to customers based on sample audits of individual cases and other assessments of company practice. These reports are to be provided in a form that enables comparisons to be made across companies. The service areas to be covered to include:
• complaint handling;
• customers in debt; and
• services for customers with special needs.
• Advice on incorporating measures of quality to complement existing qualitative measures— particularly ease of telephone contact DG9.
• Advice on monitoring companies' handling of customers in debt if and when companies are prevented from disconnecting customers for non-payment of charges.
• To bring to the Director's attention issues of customer service which may require the exercise of his powers or which raise broader policy issues. In respect of issues concerning multi  utilities he expects close liaison with relevant customer representative.
• To report changes to the Ofwat database of best practice.

• Advice on tariff rebalancing and, more generally, the development of companies' charging policies.
• Advice on the criteria the Director will apply for approving charges schemes.
• Advice on the specification of tariffs for vulnerable groups which could be the subject of the Director's approval.

• Advice on the desirability, or benefits, of extending market competition.

To provide advice or information on issues which may arise during 1999–2000.

CSC/ONCC priorities for the Ofwat forward programme

Ofwat has taken into account a request by the CSCs and ONCC to give priority to the following issues:

Consultation

• The Director to consult the CSCs and/or ONCC on all matters affecting the interests of customers.
• The Director to take account of the CSCs and ONCC representations in carrying out his statutory duty to protect customers' interests.

• The Director to provide the CSCs and ONCC with sufficient information to enable them to properly carry out their duties to represent customers interests, including the provision of confidential information to individual CSC Chairmen by mutual agreement.

• The Director to meet the CSC Chairmen and the CSCs as appropriate to hear their representations in person on the draft determinations of new price limits and on other matters which significantly affect customers' interests.
• The Director to attend ONCC meetings to provide a report on his current work and on policy developments and to answer questions from Council members.

The CSCs and the ONCC look to the Director to give priority to the following issues:

Periodic Review

• To set the tightest possible price limits in November 1999 including the greatest reduction in bills in the first year of new price limits (2000–01).

• To involve the CSCs and/or the ONCC fully in decisions on the process and the criteria for the approval of companies' charges schemes.
• To issue updated guidelines to the companies on dealing with customers in debt and to introduce revised monitoring arrangements once disconnection for non-payment is banned.

• To improve the scope of and the level of payments in the Guaranteed Standards Scheme.
• To introduce more qualitative measures for the monitoring of companies' performance.

• To work with the CSCs and the ONCC in advising Government to ensure that the new Consumer Council for water is at least as effective as the current consumer representation arrangements and that good working relations are maintained between the new body and the Director.

To support the CSCs and the ONCC in promoting the development of competition in the industry.

COST EFFECTIVE REGULATION

Our forward programme for more cost efficient regulation, consistent with delivering open and effective regulation, includes work on:

• evaluation of PR99;
• review of the July Returns and regulatory accounts;
• work with other regulators; and
• efficient management of our resources.

We will evaluate PR99 and consider ways in which it could have been simplified and streamlined, to provide learning points for the conduct of the 2004 review.

Our evaluation will include an examination of methodology, documentation, the process with companies and consultation with interested parties.

Review of the July Returns and regulatory accounts

We will look at the burden and timeliness of information provided by the companies, used in regulation and disseminated to customers and others.

Companies have indicated that reporting requirements for the July returns, the yearly submissions by the companies, are too great a burden. We will assess the data collected to eliminate any redundant data collection and, also, the feasibility of bringing forward the submission date. This process will include consultation with interested parties.

Work with other regulators

We will work with the other regulators on regulatory issues associated with multi-utility companies and other matters of common interest e.g. consistency of approach in methodology and the spread of best practice.

Efficient management of our resources

We will continue to improve efficiency by scrutiny of budgets, to ensure fixed and variable costs are used effectively for regulation. Our staff represent our greatest asset, we will continue to invest in their development.

Ofwat is an organisation that currently spends over £10 million per annum, employs 200 staff and functions from nine offices. The headquarters is based in Birmingham, with eight offices supporting the ten CSCs across England and Wales. In order to improve our cost efficiency and effectiveness as a regulator, we will carry out the following over the next three years:

Office accommodation: As leases expire an option appraisal, including a space utilisation study, will be carried out to assess the scale of economies that can be made.

Birmingham HQ: In 1989 Ofwat was established in Birmingham to facilitate ease of communication with the customer regions and company locations. Ofwat reaffirms that Birmingham offers the ideal location for the economic regulator. The use of floor space at our Birmingham HQ will be regularly reviewed to optimise the use of this accommodation.

Year 2000 compliance: Ofwat places heavy reliance on IT systems and networks. During 1999, action will be completed to ensure that Year 2000 compliance is achieved by June.

Information system and IT services: In 1993 Ofwat initiated an IT strategy based on a corporate database, on-line analysis and processing (OLAP), and a suite of compatible micro computer applications. With the pace of software, networking and hardware development, it is necessary to review the current architecture and processes. This will reflect other reviews of our information requirements, the July Returns and outcomes for action from the study of the process supporting PR99. The aim is to provide a system and service that responds effectively to the needs of the office and the CSCs.

Staff: Recruitment, training and development of staff are critical to the success of the office. Recruitment will focus on attracting high-calibre specialist and generalist staff plus developing staff for promotion.

Salary scales will be maintained at a level that attracts the necessary expertise and experience.

Skill mix and staffing levels will be managed to ensure that we function effectively as a regulator.

The office will evaluate on an annual basis the benefits of the previous year's Training and Development Plan. The aim is to ensure that the plan provides value both to the organisation and to individual careers.

Each year individual appraisals will be carried out with the aim of assessing individual training and development needs and performance; this will form the basis for the Training and Development Plan.

During 1999 the office will complete its preparation for an Investors in People assessment in September. This external accreditation will recognise the office's commitment to involve and develop each member of staff in making their contribution to a high profile and successful organisation.

External relations

• We will provide a fast and efficient press office service, including press notice production, briefings, interview arrangements and other proactive media activities, such as writing articles. We will measure and monitor media coverage.
• We will provide an efficient public enquiry service and a comprehensive library service. We will make Ofwat publications available to all interested parties on demand and make publicly available the water companies' returns (July Return and PR99 information submissions) and responses to Ofwat consultation papers and other material.
• As the Internet is increasingly recognised as a major medium for communication, to continue to develop the Ofwat Website to cater for the growing number and diversity of users.

The Prime Minister has a stated requirement that there should be no material disruption to the functions of the UK economy as a result of the millennium computer bug. In the summer of 1998, Ofwat was asked by the DETR to monitor progress in the water and sewerage and water only companies in respect of their year 2000 projects. Ofwat will continue to monitor progress to 2000 and report at regular intervals to Ministers.

This will include independent verification of company progress.

OFWAT MANAGEMENT

Ofwat's purpose is to act as the effective economic regulator of the water and sewerage companies in England and Wales. In doing so it seeks to provide value for money. An effective system of office management is fundamental to fulfilling the Director's statutory responsibilities and the realisation of his financial objectives as the Accounting Officer.

Executive structure

The Director is responsible for establishing policies and objectives and for the stewardship of the office's resources.

The Assistant Director and Head of Operations is responsible, with line managers, for ensuring that the procedures set by the Director, and applicable rules and regulations, are observed.

The Director is advised by a number of groups and/or committees on the formulation of policy, management of resources and external relations.

Executive Policy Group

This group meets weekly and is chaired by the Director. Its role is to advise the Director on the formulation and communication of regulatory policy and to monitor progress on the outputs of the office.

The panel of senior industrialists

In 1998 the Director recruited five senior industrialists to advise him during PR99. This panel has proved to be a valuable source of external advice as its members have a wealth of experience in the management of large industrial businesses.

Executive Management Group

This is chaired by the Assistant Director and Head of Operations. It meets monthly and reports to the Director. Its responsibilities cover office procedures and resource management.

External Relations Group

The group meets monthly to discuss and agree the presentation of policy decisions and to promote external links and relations. The group is chaired by the head of External Relations, and includes the Director, heads of divisions and the Chairman of the ONCC.

Auditors

The external auditors of Ofwat are the National Audit Office (NAO). Internal audit is provided under an outsource contract by KPMG. This contract is market tested.

Internal control

The Director, the Assistant Director and Head of Operations and senior managers are responsible for the system of internal financial control. This aims to safeguard the offices' assets and ensures that proper accounting records are maintained and that financial information used within Ofwat and for publication is reliable.

Organisation and culture

The driving ethos of Ofwat is that of public service. All staff work and act in a culture of integrity, fairness, competence and responsibility. This approach is lead by the Director and members of the Senior Civil Service.

Financial reporting

There is a comprehensive financial and business planning system, including delegated annual budgets approved by the Director. Forecasts are regularly prepared and performance reviewed twice a year.

Financial control

Ofwat adheres directly to Government accounting rules and has in place resource accounting procedures approved by Her Majesty's Treasury (HMT) and the NAO.

Contract and project control

Procedures are in place to ensure that risks are identified through the awarding and monitoring of external contracts, and the management of projects. Procurement and project management procedures are regularly reviewed.